Cryptocurrency vs Fiat Money: Which is really better?

Today, the value of cryptocurrencies is measured against that of fiat money, a government declared legal tender, such as the U.S. Dollar. Decades ago, cash was the only form of money, but now, most people make transactions electronically in their lives. Over the past several years, there has been an on-going discussion about global progress towards a society completely without paper cash. With all different types of digital money accounts, what is really the difference between traditional electronic currency issued by banks and decentralized cryptocurrencies like Bitcoin and will there come a time when cryptocurrencies replace fiat money? Let’s examine the noteworthy differences between fiat money in your bank account and cryptocurrencies like Bitcoin in your digital wallet.

A major difference between the two is that Bitcoin is a deflationary currency. The value of Bitcoin will likely increase until the last Bitcoin is mined, capped at 21 million supply. This is a great benefit as there are only so many bitcoins, which causes purchasing power to increase. With fiat money, there is no telling how much money is in circulation, and nobody knows when the central banks are printing more money. Fiat money is no longer even backed by gold and its value is only based on the faith placed in it. In the United States, the average annual inflation rate has been 3.22%. That doesn't sound terrible until we realize that at that rate, prices will double every 20 years and something that cost $100 in 1914 would cost over $2,300 now! The purchasing power of fiat money gets eroded over time and therefore, as a store of value, Bitcoin is the clear winner.

Cryptocurrencies offer security to its users from the fraud that may occur between a buyer and a seller. The underlying blockchain technology aims to address many challenges associated with digital transactions such as currency reproductions, cross-border transactions, data security, double spending, and even scams. Utilizing blockchain reduces the costs associated with online transactions, while at the same time, increasing legitimacy and security. Through verification of each transaction, blockchain technology helps with protection of sensitive records and authentication of the identity of a user by spotting data manipulation. Using distributed ledger and smart contracts, people can exchange valuables across continents without any risk of a scam as only authorized individuals will have access to transactions that are made on a blockchain network. Even the biggest companies in the world can't ignore blockchain any longer. No wonder U.S. tech giant Apple, financial juggernaut JPMorgan, and multinational conglomerate Samsung are all in various stages of exploring the technology.

Processing fees are involved for both cryptocurrencies and traditional banks, however, the costs and speed of these transactions vastly differ. Cryptocurrencies were created with the intent to address the flaws in the current banking network which include long wait times for payments to settle and excessive transaction fees. Not only do cryptocurrencies eliminate the transaction fees tied to banks that only act as middlemen, they settle payments in a matter of seconds. Ripple is a prime example of a cryptocurrency simplifying global banking, as their blockchain technology aims to reduce the traditional multi-day wait time to an almost instantaneous settlement. Major financial institutions are in agreement with Ripple’s vision and are adopting its XRP token in an effort to make their existing payment processes faster, cheaper, and more secure because they know the new generation customer will no longer wait days for an international payment to settle.

Cryptocurrency is money without counterparty risk because the payment system is embedded within the protocol of the money itself. Sending and receiving is fast and secure – it does not need intermediation. The current fiat money system has been fragile for a truly long time. Fiat currencies need a highly regulated ecosystem of national and international institutions to function. Cryptocurrencies are self-regulated and not impeded by national boundaries. The end of the government fiat money monopoly will likely result in currency competition, a loss of the power over monetary policy, a migration of many institutions from government money to private money, and even a possible abandonment of fiat in favor of government-backed cryptocurrencies.

The difference between the present and the past is that we now have a perfect alternative for the digital age. We are living in a time in which we will experience the replacement of central banking and possibly even fiat currency by a completely new system powered by cryptocurrency. People now have options. The innovative idea for a more secure financial future will be the main driving force behind the adoption of cryptocurrency as a payment method. Most crypto projects are still in their early stages of development and still have years before they can prove their uses, but when they do, we will see the largest transfer of wealth in history. This transition will be fundamental to humanity and will be the central global struggle for the coming decades.